Cross Timbers Royalty Trust 2012 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust is an express trust created under Texas law, holding defined net profits interests in oil and gas properties owned by XTO Energy Inc. (a wholly-owned subsidiary of Exxon Mobil Corporation). The trust has no employees; administrative functions are performed by the trustee, U.S. Trust, Bank of America Private Wealth Management. The reporting period covers the fiscal year ended December 31, 2012. The trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties located in Texas, Oklahoma, and New Mexico.
Key Financial Metrics
- Net Profits Income: $15,283,504 for 2012 (down from $18,381,657 in 2011).
- Distributable Income: $14,889,588 for 2012.
- Distributions per Unit: $2.481598 for 2012 (down from $2.992749 in 2011).
- Total Assets: $13,840,567 as of December 31, 2012, consisting primarily of cash/short-term investments ($1.31M) and net profits interests ($12.53M).
- Production Volumes (Net Profits Interests): 91,591 Bbls of oil and 1,652,911 Mcf of gas.
- Average Sales Prices: $89.54 per Bbl for oil and $5.81 per Mcf for gas.
- Development Costs: $1,490,054 (up 139% from 2011 due to increased activity).
- Proved Reserves: 994,000 Bbls of oil and 22,100,000 Mcf of gas allocated to the trust.
Material Changes vs. Prior Period
Net profits income decreased 17% year-over-year. The decline was primarily driven by a 21% drop in average natural gas prices (from $7.37 to $5.81 per Mcf), which reduced income by approximately $2.6 million. This was compounded by a 139% increase in development costs ($0.7 million impact) and higher production expenses ($0.6 million impact). These negative factors were partially offset by a 3% increase in average oil prices, which added approximately $0.5 million to income. Underlying gas sales volumes remained relatively flat, while oil sales volumes increased slightly by 1%.
Outlook, Risks, and Management Commentary
- Outlook: Management notes that oil and gas prices are expected to remain volatile. Budgeted development costs for 2013 are approximately $2.9 million, higher than the $2.4 million budgeted for 2012.
- Excess Costs: Costs exceeded revenues on Texas working interest properties in August 2012. However, these excess costs were fully recovered by October 2012, and no excess costs remained at year-end.
- Risks: The trust is highly sensitive to commodity price fluctuations. It holds depleting assets with an estimated reserve-to-production index of 12 years. The trust has no control over operations, which are managed by third-party operators or XTO Energy. Regulatory changes regarding greenhouse gas emissions could increase operating costs.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Income is recognized when received, and expenses when paid.
Investor Verification Checklist
- Verify the impact of current natural gas price volatility on future monthly distributions, given that gas accounts for approximately 49% of net profits income.
- Confirm the status of development activities on the 75% net profits interest working properties, as increased costs directly reduce distributable income.
- Review the reserve-to-production ratio (approx. 12 years) to assess the long-term depletion rate of the trust's assets.
- Monitor the "excess costs" mechanism; while currently zero, future cost overruns on working interests could temporarily suspend distributions from those specific conveyances.
- Check the trustee's cash reserve levels and investment strategy, as cash is held in certificates of deposit and federal obligations.